Professional Indemnity Insurance / PII
Professional Indemnity Insurance is obligatory for accountants, lawyers and financial advisers. It covers your business financially for any harm, or undesirable effects, that affect a customer as a result of an employee's actions. The UK relies heavily on its service industry, and even for those firms who are not obligated to take out Professional Indemnity (PI) insurance, it is strongly recommended that you have this cover if you provide a service to customers. Occupations such as architects and business consultants are also advised to have PI insurance, as well as anyone involved in the medical profession. Medical professionals will usually purchase specialised cover from organisations such as the Medical Defence Union, which provides tailor-made cover for the risks involved in practising medicine.
If an employee gives false or misleading advice, or is negligent and careless conducting business tasks in which they should be competent, the well-being of customers may be jeopardised. Businesses are aware that human error can never be eliminated, but should a customer suffer a physical injury or financial loss and trace the fault directly to the business, they will be within their rights to pursue legal action. There is an increasing likelihood that customers will sue businesses if they feel dissatisfied with the service received, and they may be granted large sums of money against you; PI insurance offers businesses financial protection from expensive legal cases.
PI insurance can usually be obtained via insurance brokers and mainstream private insurance companies as well as specialist insurers for the industry in which your business operates.
Most PI policies come with a 'limit of indemnity' clause which indicates the maximum value that the insurance company will contribute towards any claim made against you. If your business does not have a particularly high income, insurers will generally offer a minimum cover of around £50,000, although many recommend that your minimum level of insurance should be around £250,000. Maximum values can up to ten million pounds or even more; usually these figures are for large companies, and typically subject to negotiation.
Any outstanding liability lies with the business, as does the agreed 'excess' fee; the excess is agreed in your policy and is the amount of any claim made that you agree to pay yourself. Remember that you must have enough money available to cover the excess if a customer makes a claim against you; if you cannot pay an excess the insurer will charge you much higher premiums because they are required to cover the entire claim. Your premiums will be calculated according to the insurer's analysis of the potential risk of your business' activities and the harm they could cause in the worst case scenario.
Any payment that your insurance company makes will usually be monetary compensation to the customer, but it is also possible that the insurance company will give you funds for putting preventative measures in place for the future, or towards the cost of fixing the problem.
It is possible that negative effects will not come to light for several years after the 'faulty' work has occurred. For this reason, professionals with PI insurance should ensure that they are covered for a number of years after they finish practising, to avoid being liable for large claims in the future. This is known as 'run-off' cover, and the minimum run off period is usually around 6 years, although some professions may require this period to be longer. Most insurance premiums are much cheaper during the run off period, as the likelihood of a claim is low.
Some organisations require their clients and partners to prove that they have PI insurance. It is possible therefore that not having it may limit your business prospects. Furthermore, PI cover offers you peace of mind; any claims made against you are likely to be covered by your insurer and are therefore rarely as financially damaging as they would have been without insurance. Although having PI insurance means that your business is less likely to suffer financially in the long term, a high-profile claim made against your business could lead to irreversible damage to your reputation. For this reason it is important that PI is combined with careful employee training, and that you take care to inform customers of any risk involved in their decisions before something goes amiss.
